Tuesday, February 9, 2010

Hayeks “Cosmos and Taxis” illuminates the dichotomy between the two systems we all must answer to, cosmos and taxis, the self-made system and the artificial system respectively. Let’s call cosmos the free market, and taxis the organizations we contrive inside and outside the market. Some contrived organizations contribute to the market, such as corporations, and some exist to contain it, such as governments; tonight it is the containers that interest me. Just how does one regulate a system that can only be understood by analogy, or at best by the side effects, the residue, it produces on the outskirts? Limitations are often the only frame of reference available to grasp very complex orders, orders that greatly exceed our capacity to wholly understand them. With that premise in mind, consider Hayek’s belief that a grown order will be limited by our ability to understand it (rationalize it), yet a spontaneous order will limit itself within the confines of its natural boundaries, such as available energy and resources. However, within the market’s natural parameters, governments place artificial boundaries meant to further contain and control the market; sometimes the rules can benefit the market (such as transparent accounting), though most often it does not (as in nearly every government intervention). And this I believe is the primary conclusion towards which Hayek is building: That economic rules cannot possibly target and control individual functions of the market.

The global economic system is too complex, too dynamic and too reactive for a targeted action to be genuinely effective. The only effective means of control is to manage and regulate what we actually control, such as corporate governance or transparency. Furthermore, if governments must wade into the system with market initiatives, it should only be with light, broad strokes. A narrowly focused incursion into the system will probably “miss” the target and result in an unintentional and equal reaction, like a bubble somewhere else in the economy. Often this anomaly will not be where we expect it, it’s possible that it will bulge out anywhere and at any time. Market anomalies do not have one cause, nor do they have one specific origin, but wherever there is a market failure, there is a nearby traceable government incursion. Therefore the only non-disastrous way to regulate the global economy, to control a system we cannot possibly understand, is with the broadest response available, such as monetary policy. It is the response that applies pressure to the cosmos most equally and most gently that will be the most effective at controlling our global economy.